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Buy SBI Cards and Payment Services Ltd For Target Rs.1,205

Significantly better placed in covid 2.0

We hosted the top management of SBI Cards, represented by Mr. Rama Mohan Rao - MD & CEO, Nalin Negi - CFO, Aparna Kuppuswamy - Chief Risk Officer, Girish Budhiraja - Chief Product & Marketing Officer and Manish Dewan - Chief Sales Officer.

Overall estimated impact for Covid 2.0 is significantly lower than Covid 1.0 on account of better preparedness to manage all business functions digitally and rolling nature of lockdowns. RBI Re book continues to run off on the expected lines and overall restructuring quantum is expected to be much lower in Covid 2.0. SBIC is now better prepared to make a calibrated journey post the experience in FY21.

We remain positive on SBIC’s long-term fundamentals (PPOP / PBT grew 38% / 23% between FY17-FY21). We have cut our FY22 earnings estimate to factor covid related impact. Maintain BUY with a target price of Rs1,205 (unchanged) based on 40x FY23 EPS of Rs30. Possible recurring covid cases pose near-term risk.

* Factoring Covid 2.0 in FY22 estimates. Covid will impact Q1FY22 spends and card additions, especially in the month of May. Gradual restoration in Q2 and complete normalisation in Q3/Q4 can be expected on the basis of current trends in fresh Covid cases and the pattern of spend revival seen in 2HFY21. We now factor spends of Rs1.6trn / Rs2.3trn in FY22/23 vs Rs1.2trn of FY21. Covid impact can also see prolonged higher share of transactor within the spend mix while cost of debt can rise from FY21 levels. As such, NIM is expected to compress YoY in FY22.

* No specific concern on RBI Re book as its run off continues on expected lines. Due to (1) already significant elapsed passage of time (RBI Re book was mostly formed during Sep/Óct’20), the seasoning of the book has largely happened and (2) already made provisions (80% for the 90DPD portion of Rs6.85bn and 65% between 30 and 90DPD within RBI Re as of FY21-end), fresh stress on this book is not expected to be significantly large. There is a separate collection team for RBI Re book giving 30-40 digital nudges every month. As such, monitoring and ascertainment is also much better currently.

* Restructuring due to Covid 2.0 is expected to be significantly lower than Covid 1.0. This is driven by the fact that restructuring window under Covid 2.0 will be much lower than Covid 1.0. As such, there will not be any huge backlog as experienced post Covid 1.0 and the collection efficiency should work better, especially with digital capabilities that can pick up collection efforts when there is a drop in field efforts. The board-approved restructuring policy will follow the RBI guidelines in terms of due diligence and clear demonstration of covid-related stress.

* Covid also leads to expectations of a sharp jump in earnings in the first full year of normal operations (FY23 as of now). We factor spend CAGR of 21% between the last normal year(FY19) and first expected normal year after Covid (FY23) with 17%/2% CAGR in CIF/spend per card. Total spend CAGR between FY16-19 was 52%. We factor NIM of 17.4% in FY23 (similar to FY20 level) with credit cost of 8.9/7.5% in FY22/23 compared to 11.4% in FY21. This lead to an earnings CAGR of 34% between FY19-23E although Covid impact leads to 94% YoY earnings growth in FY23.

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